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The robust growth of Saudi Arabia's economy has been coupled with a rapidly growing
population fueled by a strong influx of expatriates. With a population growth rate exceeding
2% p.a., Saudi Arabia's healthcare budget as a percentage of its GDP has increased from
3.2% to 4.3% over the period 2008 to 2012. Underpinned by solid healthcare demand
fundamentals, the pharmaceutical industry has consequently grown in the same time
from USD 3.0 bn to USD 3.8 bn. This growth was also supported by several key demand
determinants including rising wealth levels, increased private consumption of medicines,
improved longevity and a growing number of chronic diseases such as diabetes and
gastrointestinal disorders.
The pharmaceutical sector is expected to maintain its strong growth momentum however a
gradual shift towards low-cost generics coupled with a stronger market penetration of global
pharma players might lead to a redefinition of the competitive landscape. One probable
outcome may yield a bi-polar market dominated by branded patented drugs on one hand
and low-cost generics on the other. As a result, domestic players may end up squeezed in the
middle having a diluted value proposition with only the fittest surviving the race.
Domestic players are mostly focused on branded generics manufacturing, i.e. off-patent
prescription market. Some of them are also handling contract manufacturing opportunities
under license agreements with international players Pfizer, GSK and J&J.
While the Government is actively supporting the growth of local value chains by encouraging
joint ventures and sponsoring non-tariff barriers in the form of price control mechanisms,
domestic players face two main imminent challenges:
1. Muscling in of global pharma giants into Saudi Arabia
2. Expected rise in popularity of generics produced in low-cost countries
Roland Berger Turkey, Middle East & Africa 5
Moreover, it is foreseen that several 'blockbuster' drug patents will globally expire during the
next six years, putting over USD 200 bn of sales at risk for pharmaceutical giants. Such a loss
of exclusivity, known as the patent cliff, coupled with no mitigating new patents significantly
weakens the position of pharmaceutical manufacturers primarily reliant on innovator drugs.
In this context, Saudi Arabia offers significant potential. Underlying the interest of big pharma in
the Kingdom is a strong consumer preference for branded drugs. Today, branded pharmaceutical
products account for around 80% of the total pharmaceutical sales in Saudi Arabia.
Nevertheless, a key issue facing global pharmaceutical exporters to Saudi Arabia are the
regulatory obstacles imposed by Saudi authorities attempting to protect local manufacturing.
These include protracted registration procedures for foreign drugs, requirements for re-
certification and stringent price control mechanisms on certain drugs. As a result, global
pharma giants have to date only established limited direct presence in Saudi Arabia in the
form of joint ventures with local firms. In fact, most international companies still favor market
access through trade or licensing-out agreements mainly because of intellectual property
concerns and regulations favoring domestic players.
The establishment and proliferation of multiple free-zones across the Kingdom however
has allowed foreign players to establish 100% foreign-owned operations and is expected
to position Saudi Arabia as a pharmaceuticals manufacturing hotspot capable of luring
global giants. In this respect, King Abdullah Economic City (KAEC) has already attracted the
attention of big pharma players, e.g. Sanofi-Aventis and Pfizer, leading to agreements for the
setup of manufacturing facilities in Saudi Arabia. The entrance of players in the Saudi Arabian
market will alter the competitive landscape for existing domestic manufacturers and indirectly
alleviate cumbersome regulatory pressures thereby yielding a level playing field. Furthermore,
new entrants will benefit from their increased proximity to the market and hence become
more competitive. In the context of public procurement, local players will undoubtedly benefit
from increased exposure to public tenders and will be able to adapt quicker than their distant
counterparts to what is essentially a dynamic competitive process. In the private sector, big
pharma will be able to keep a closer watch on activities further down the value chain for
which they depend on local collaboration with established market ties.
Roland Berger Turkey, Middle East & Africa 7
Once established in the Kingdom, international companies will jeopardize a core component
of the operations of local players as a number of licensing and contract manufacturing
agreements become redundant. This will manifest itself in the form of reduced reliance on
local producers for the import of branded pharmaceuticals.
Crucially, the continued gradual loss of exclusivity facing Big Pharma will allow competitively-
priced generics to be manufactured in low-cost countries (LCCs), such as India and China,
leveraging their substantial manufacturing resources and economies of scale. Manufacturers
in LCCs are preparing for the impending generics boom and expanding their operations
through acquisitions and major capacity additions.
Saudi Arabia will also be affected by the rise of generics. As of today, generic drugs account
for less than 20% of the pharmaceuticals market. Nonetheless, several factors, mostly
notably the increasing need to curtail spending on pharmaceutical products as the Kingdom
transitions towards a market-driven model, will contribute to the growth of generics in both
the public and private sectors.
Despite Saudi Arabia's increased overall public spending on healthcare, a staggering CAGR
of 17% over the period 2009-2012, the government has succeeded in reigning in its pharma
expenditure as a percentage of the total healthcare spending, decreasing from 17.3% in
2009 to 13.5% in 2012.
The curtailing of pharmaceutical expenditure was achieved through the adoption of several
measures including the introduction of regulations aimed at promoting/favoring local
production, the establishment of a national Pharmacoeconomic Research Center and the
setting-up of the National Unified Procurement Company for Medical Supplies (NUPCO). This
has allowed the government to channel healthcare funds towards front-line operations such
as addressing bed capacity shortages across the Kingdom.
It is expected that NUPCO will follow other government entities in adopting policies
favoring domestic production companies. However, given its primary mandate of low-cost
procurement, it is not clear if its establishment will support homegrown pharmaceuticals in
the long-term. The sheer scale of NUPCO's operations coupled with its growing bargaining
power with suppliers could negatively impact the profitability of domestic branded generics
manufacturers unable to compete with LCC pharmaceutical giants in terms of volume and
price. Four years after the establishment of NUPCO, the Kingdom's existing medical import
and distribution firms are already complaining that NUPCO is negatively impacting their
business as they are unable to compete on scale.
Moreover, the penetration of private health insurance will play in the favor of generics as
insured expatriates, and eventually Saudi nationals, are channeled towards private hospitals
and healthcare facilities. In the short-term, this trend will serve the interests of domestic
manufacturers as their product offering primarily focuses on branded generics.
Nevertheless, once insurance providers secure a strong foothold in the market, their increased
leverage over healthcare providers will allow them to drive private healthcare prescriptions
towards cheaper forms of generics manufactured in low-cost countries, as is already the case
in several developed markets.
10 Saudi Arabian pharmaceuticals
Aside from the regulatory hurdles facing foreign imports (in terms of approval, etc.), the
Saudi Arabian government is currently able to stifle competition from LCC pharmaceuticals
through tight pricing controls which fix relatively low retail prices for imported products
preceded by domestic counterparts. Given the legally established fixed profit margins for
Saudi Arabian wholesalers and retailers, overseas suppliers wishing to enter the Saudi market
are forced to cut their prices, effectively single-handedly bearing the financial burden of
entering the Kingdom.
Yet, the efficacy of such pricing controls is tightly linked to current demand patterns – any change
from the status quo will considerably alter market dynamics. Thus, it is important to note that
the trend towards low-cost generics will prevail even with the price control mechanisms currently
shielding domestic players from LCC manufacturers. The forecast avalanche of demand for low-
cost generics – both from increased insurance penetration and anticipated public procurement
tenders via NUPCO – will compensate for the lower margins of LCC manufacturers, adding further
pressure on domestic players. Any future softening of protectionist policies (for example, as a
result of the Kingdom striving for full compliance with its 2005 WTO accession) will however
leave domestic manufacturers stranded, competing head to head with generics heavyweights
who enjoy a dramatically lower cost-base and optimized operations.
>> How should players position themselves along the value chain (e.g. development,
production, marketing, sales, distribution, retailing)?
>> How should companies optimize their business model in preparation for the entry of Big
Pharma into the Saudi market? How should they leverage their in-depth knowledge of the
Saudi market and in turn ensure their survival and prosperity?
>> What is the best approach to optimize operational efficiency (e.g. strategic sourcing
strategy, inventory management, logistics)? Which activities (core vs. non-core) should be
kept in-house and which should be outsourced/offshored?
>> What is the value proposition provided by players? Which brand strategy should be
adopted to create "local champions" in order to maximize returns?
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>> Strong dependence on patents: Given the industry's patent-based nature, manufacturers
need to manage the dilemma of investing in product branding vs. corporate branding –
The benefits of investing in patent-expiring drugs should be carefully weighed against the
risks of the penetration of low cost generics
>> Regulated environment: Regulations increasingly fragment the market with recent drug
approvals encompassing more specialized therapies targeted at smaller sub-groups of
patients – The branding and marketing of niche products strains most feasibility studies
and should hence be assessed on a case-by-case basis
>> Diverse target groups: Beyond addressing patients, prescription products in particular
involve a diverse set of stakeholders including healthcare professionals, manufacturers
and insurers. The aforementioned stakeholders influence and even make decisions on
behalf of patients – A comprehensive branding strategy should target the entire landscape
of stakeholders to achieve an optimal outcome
In order to survive, domestic players – manufacturers in particular – must assess their strategic
positioning in the market and consider how best to capitalize on new opportunities in a changing
environment. Possible strategies include a reassessment of the value creation architecture and
adopted business model as well as the building-up of a strong brand equity.
Ultimately, the best-positioned players will be those who understand their respective strengths and
weaknesses and possess the strategic agility to navigate the changing landscape accordingly – only
the fittest will survive.
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Roland Berger’s business is organized into global functional and industry competence
centres. Its practice areas include corporate development, marketing and sales, operations
strategy, restructuring and corporate finance and information management. Industry special-
ties include automotive, consumer goods and retail, energy and chemicals, engineered
products and high-tech, financial services, information communications, pharmaceuticals
and health care, public services and transportation.
18 Saudi Arabian pharmaceuticals
Michael Caracache
Senior Project Manager
Almoayyed Tower, 21st Floor
Manama, Bahrain